Re Seven Holdings Ltd

The court refused permission for a shareholder to continue multiple alleged wrongs as derivative claims under the Companies Act 2006. The judge applied the statutory thresholds in sections 260 and 263, holding that many allegations did not disclose a cause of action by the company or did not arise from acts or omissions by the defendant in his capacity as a director. The court also applied section 263(2) and (3) factors, concluding that a hypothetical director acting under section 172 would not pursue the claims because they were weak, speculative, small in value relative to litigation costs, or better resolved in a winding-up or by a liquidator. The court emphasised that many disputes concerned loan-account balances and allocation of supplies and would be more efficiently resolved in liquidation. The statutory ex parte filter for derivative claims had been bypassed in the procedure adopted and that procedural distortion was lamented but did not alter the substantive refusal of permission.

Background and parties

The action was brought by Langley Ward Limited (on behalf of Mr Percy) seeking permission under the Companies Act 2006 to continue a range of derivative claims against Mr Gareth Wynn Trevor and Seven Holdings Limited. The company was a quasi-partnership with two equal shareholders and sole directors: Mr Percy and Mr Trevor. The relationship broke down, the company was deadlocked and in breach of filing obligations, and sales of development properties were in progress.

Nature of the application

• The applicant sought the court's permission under sections 260 et seq. of the Companies Act 2006 to continue numerous alleged causes of action on behalf of the company. He also sought an order under CPR 19.9E that the company indemnify him for costs.

Procedural posture

The case was first instance in the Chancery Division. The statutory ex parte preliminary stage was not conducted in the normal way: the early applications (including a freezing order) were the subject of a consent order and both sides litigated the merits of permission on an inter partes basis before the judge. The company was not made a respondent and the court noted the statutory scheme had been undermined.

Issues framed by the court

• Whether each pleaded claim disclosed a cause of action for which derivative relief under section 260(3) could be granted (including whether alleged acts were in the defendant's capacity as director).
• Whether, under section 263(2) and (3), permission must be refused because a director acting under section 172 would not seek to continue the claim, and what weight to give listed and other factors (including costs, size of claim, company funding, alternative remedies and the prospect of winding-up).
• Whether the claims were more appropriately resolved in liquidation or by alternative remedies such as an unfair prejudice petition.
• Whether the applicant should receive an indemnity from the company for costs under CPR 19.9E.

Court's reasoning

The judge addressed the statutory thresholds. He found several pleaded claims failed section 260(3) because they did not arise from acts in the defendant's capacity as a director or did not disclose a company cause of action. On section 263(2)/(3) the court held that a hypothetical director complying with section 172 would not pursue the majority of claims because they were speculative, inadequately pleaded, lacked supporting evidence (for example no valuation evidence for overpayment allegations), or were small relative to litigation costs.

The court gave particular weight to the company's deadlock and the realistic prospect that it would be wound up. Many disputes concerned allocation of payments, loan accounts and supplies; those matters would be more efficiently and appropriately resolved in liquidation or by accounting in winding-up rather than by expensive derivative litigation. The judge therefore refused permission in respect of the Group A claims (those alleging overpayment, conflicts, and individual breaches) and Group B claims (claims concerning supplies, loan account adjustments and internal payments). The court also commented adversely on the bypassing of the ex parte filter and stressed the statutory preliminary stage is an important procedural safeguard.

Remedy sought and disposition

The claim for permission to continue the derivative action was refused in its entirety. The court indicated that, had it entertained any grant of permission, it would have required the claimant to fund the litigation personally and without indemnity from the company in light of the weaknesses identified.

The application for permission to continue the derivative claims was refused. The judge held that many pleaded claims did not arise from acts by the defendant in his capacity as a director or otherwise failed to disclose a proper company cause of action under section 260(3). On the section 263 assessment the court concluded that a director acting in accordance with section 172 would not pursue the claims, and that the disputes were more appropriately resolved in liquidation given the deadlock and the company’s likely winding-up. The court also criticised the bypassing of the statutory ex parte screening stage.